CHICAGO –May 5, 2015 – The U.S. energy industry continues to struggle to find its footing as commodity prices remain stubbornly low. This year’s BDO Oil and Gas RiskFactor Report, which analyzes the risk factors listed in the most recent 10-K filings of the 100 largest public U.S. E&P companies, finds that low prices are dampening companies' enthusiasm for investing and expanding—and amplifying the potential impact of impediments to future growth.

For the first time since the study's inception, risks related to replacing or expanding reserves was the most frequently cited threat, with all companies indicating low prices are inhibiting their ability to make key investments in maintaining supply. According to IHS, the pain is widespread: The number of newly-discovered oil and gas reserves reached a 20-year low in 2014. Amid this uncertain supply environment, 82 percent of companies also expect to experience shortages in rigs, equipment and personnel, further constraining their ability to keep up production. This represents a 5 percent jump in the number of companies citing similar concerns in last year’s study.

“Many in the oil & gas industry expected the commodity pricing environment to improve fairly quickly, but a variety of market forces—including growing supply in the Middle East and difficulties exporting U.S. resources abroad—have conspired to hit U.S. producers’ bottom lines hard,” says Charles Dewhurst, leader of the Natural Resources practice at BDO. “Ironically enough, the resulting lack of domestic supply may help push prices back up, but for now, it appears that U.S. companies are poised to feel the most pain as the market corrects itself.”

Moreover, the past year’s decline in oil prices is also driving increased worry about accounting-related risks, such as maintaining internal controls and complying with accounting regulations. The number of companies citing this risk grew by 47 percent, with 84 percent of companies noting it in their 10-Ks. While low prices continue to force companies to record impairments on their balance sheets, intensified scrutiny from the SEC and PCAOB is simultaneously drawing renewed attention to more stringent financial reporting—meaning E&P companies must devote ever-growing attention and resources to maintaining their books.

These findings are from the fifth annual BDO Oil and Gas RiskFactor Report, which examines the risk factors listed in the most recent SEC 10-K filings of the 100 largest (by revenue) publicly-traded U.S. E&P companies. The risk factors were analyzed and ranked in order of frequency cited.

The following is a list of the top 20 risk factors cited by the 100 largest U.S. E&P companies:

Disruption due to political instability, civil unrest or terrorist activities

83%

74%

82%

72%

52%

17.

Use of hedging or derivative instruments

82%

85%

77%

48%

N/A

17t.

Impact of climate change and greenhouse gas regulation

82%

80%

89%

81%

69%

17t.

Shortage of rigs, equipment or personnel

82%

78%

88%

81%

82%

20.

Insufficient pipeline, storage or trucking capacity

80%

84%

80%

63%

29%

*t indicates a tie in the risk factor ranking

Further findings from the 2015 BDO Oil and Gas RiskFactor Report include:

Hydraulic fracturing regulation becomes a near-universal concern. Consistent with previous editions of the study, all companies analyzed cite regulation (federal, state and international) as a risk in their 10-Ks. However, a notable trend emerging over the past several years is that concern about hydraulic fracturing (fracking) regulation has now become virtually universal. This year, 96 percent of companies identify fracking regulation as a risk, nearly double the number citing it in the inaugural Oil & Gas RiskFactor Report in 2011. With the Energy Information Administration reporting that shale formations produced approximately 4.19 million barrels per day of crude oil and 4.51 trillion cubic feet of natural gas in 2014, it is no surprise that fracking has become the bedrock of the industry—and that companies have, as a result, become increasingly sensitive to attempts to regulate it.

Middle Eastern production remains a wild card. Political conditions abroad, particularly in the Middle East, are a perennial worry for U.S. E&P companies. An overwhelming majority (83 percent) of companies cite risks associated with threats from geopolitical unrest this year, a 12 percent increase from 2014. Of particular concern is how current events are exacerbating price declines, with OPEC refusing to curb production in the face of over-supply and the potential easing of sanctions in Iran promising the reintroduction of their oil to the market. At the same time, persistent conflict in Syria and Yemen threaten to further destabilize the region, leaving the oil & gas industry uncertain as to what, if any, effects may reverberate in the sector.

About the Natural Resources Industry Practice at BDO USA, LLP
BDO’s Natural Resources industry practice provides assurance, tax and advisory services to emerging and established businesses in the United States and all over the world who are involved in both the traditional and alternative energy industries. Our clients often operate across borders either raising capital or making acquisitions abroad. Our extensive industry knowledge is supported by our international network of 1,328 offices in 151 countries, allowing us to provide a consistently high level of service wherever our clients do business.

About BDO USA
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 58 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,328 offices in 151 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com.